Activists Say Act Creates Illegal Surcharges

The Los Angeles Daily Journal

LOS ANGELES – Consumer activists contend a new state law will lead to illegal surcharges for automobile drivers who lack proof of prior insurance.

Two consumer groups have filed suit to block the law, accusing Gov. Gray Davis of being unduly influenced by insurance giant Mercury General Corp., which contributed $175,000 to anti-recall efforts after Davis signed the company-sponsored measure Aug. 2.

The Foundation for Taxpayer and Consumer Rights v. John Garamendi BS086235, (L.A. Super. Ct., filed Oct. 9, 2003).

“This is the type of behavior that angered voters and why Davis was recalled,” Harvey Rosenfield, president of the Foundation for Taxpayer and Consumer Rights, said before a Wednesday hearing in Los Angeles Superior Court. “Now we are trying to recall this law.”

Last month, the foundation asked the U.S. attorney’s office in Sacramento to look into Davis’ bill-signing and the Mercury General contributions to the anti-recall campaign.

Rosenfield’s group and the Consumers Union of U.S., Inc., filed the suit last week. At the request of the attorneys, Los Angeles Superior Court Judge Dzintra Janavs agreed Wednesday to bump up hearings from March to mid-November. The plaintiffs want the court to hold the new law unconstitutional and to stop the state from enforcing its provisions.

“We’re confident that the court will agree with the overwhelming majority of the senate, the legislative counsel and the governor that the law will stand muster and save millions of Californians money on their insurance,” said Davis representative Steve Maviglio.

Maviglio called the criticism over the contributions made by Mercury General “ridiculous.”
“The lawsuit is a publicity stunt,” he said.

The Governor’s office previously has denied supporting the bill in exchange for campaign contributions.

Mercury General, which has given more than $1 million to Davis and legislators in recent years, has denied trying to buy votes for the bill.

According to California’s Secretary of State, Mercury General gave $10,000 to Davis recall-opponent Tom McClintock.

Mercury General Chief Executive Officer George Joseph, however, was quoted in newspaper accounts as opposing the recall.

The bill in question is SB841, which allows insurance companies to give discounts to drivers who have been insured for several years, even if they have changed carriers. The practice is known in the insurance industry as the “portable-persistency discount.”

The lawsuit contends that the law is an unconstitutional amendment to Proposition 103, a 1988 voter-approved initiative written by Rosenfield. Proposition 103 amended the state Insurance Code so that the fact a driver had no prior insurance cannot be used to determine his or her insurability, insurance rates or discounts.

According to the complaint, previously uninsured motorists will have to pay more to offset discounts for the long-term insured, which amounts to an illegal surcharge. Proposition 103 stated that terms of the measure cannot be altered unless the amendments further the initiative’s purpose.

“As a result of the surcharge that SB841 permits insurers to impose on drivers who are not already insured, newly-licensed drivers and other uninsured drivers will find it more difficult to obtain insurance they can afford,” the complaint states.

In his message to the senate upon signing the bill, Davis took a different view of the portable-persistency discount.

“It will allow a consumer to keep their loyalty discount and shop with their own company or another insurer for an even lower insurance rate,” Davis wrote Aug. 2.

The lawsuit contends that last year Davis vetoed a similar bill, also sponsored by Mercury General, because it violated the intent of Proposition 103. Between the veto and the approval of the new bill, Mercury General contributed $340,000 to legislators in addition to the $175,000 anti-recall donation after Davis signed the bill, according to the lawsuit.

The bill’s supporters have said that this year’s version of the measure is improved. In his message to the Senate, Davis cited a provision that exempts military personnel, who would lose their discounts if they serve out of state. Another provision allows financially strapped individuals to allow their coverage to lapse for 90 days without penalty.

“But those issues don’t address the core issue of discriminating against people with no prior insurance,” said the foundation’s attorney Pamela Pressley, who, along with Mark Savage of the Consumers Union, is lead attorney on the case.

Nevertheless, state Insurance Commissioner John Garamendi, a named defendant in the suit, strongly opposed the bill for many of the reasons outlined by consumer groups.

“You vetoed a virtually identical bill during the last legislative session,” Garamendi wrote to Davis in July. “Those without prior insurance would end up paying significantly more in premiums to offset the discount offered to those meeting this expanded form of persistency.”

Garamendi wrote that the anticipated litigation, which Rosenfield had vowed to bring, will cost $250,000 and possibly much more in the event of appellate proceedings.

In a prepared statement Tuesday, Garamendi said: “I believe SB841 is contrary to the intent of Proposition 103. I therefore opposed this legislation when it was proposed. Now it is law and I am obliged by my oath to carry out the law. I will do so. However, I would not be surprised nor disappointed if the court finds in favor of the Foundation for Taxpayer and Consumer Rights.”

A Mercury General representative did not respond to inquiries, and Sen. Don Perata, D-Oakland, who sponsored SB841 and who has received contributions from Mercury General, also did not return calls.